On September 25, 2012, the District of Connecticut held that the definition of “whistleblower” is broader under the Dodd-Frank Act’s anti-retaliation provision than it is under the rest of the statute. Kramer v. Trans- Lux Corp., 2012 WL 4444820 (D. Conn. Sept. 25, 2012) (Underhill, J.).

Background

Richard Kramer (“Kramer”) was Trans-Lux (“Trans-Lux”) Corporation’s Vice-President of Human Resources and Administration for eighteen years. Kramer, 2012 WL 4444820, at *2. His responsibilities included “‘oversight of the Trans-Lux ERISA governed [p]ension [p]lan’” and “‘ensuring company compliance with all federal and state laws and regulations’” with respect to that plan. Id. Kramer repeatedly alerted his superiors to a number of compliance issues with the Tranx-Lux pension plan. Id. at *2-3. For example, Angela Toppi, Trans-Lux’s Chief Financial Officer and Kramer’s direct supervisor, served on the pension plan committee and also acted as the pension plan’s sole trustee. Id. at *2. “Kramer believed that Toppi’s position created a conflict of interest,” and he “reported his concerns to Trans-Lux.” Id.

In March 2009, Trans-Lux amended its pension plan. Id. “Toppi was [ ] required to bring the 2009 amendments to the board of directors for approval, and failed to do so.” Id. “Toppi also failed to file the 2009 amendments with the SEC.” Id. In March 2011, Kramer emailed his superiors “express[ing] concern that … the 2009 amendment, which had frozen salaries, had not been presented to the board of directors or filed with the SEC.” Id. On May 16, 2011, Kramer contacted Trans-Lux’s audit committee regarding “the failure to present the 2009 amendment to the appropriate bodies,” among other issues. Id. at *3. “Shortly thereafter, Kramer sent a letter to the SEC about Trans-Lux’s failure to submit the 2009 amendment to the board of directors or the SEC.” Id.

In May 2011, Trans-Lux “began stripping Kramer of his responsibilities.” Id. “On July 11, 2011, Trans- Lux announced via email that July 22, 2011 would be the last day of employment for all human resources personnel, including Kramer.” Id. Kramer thereafter filed a whistleblower retaliation claim under the Dodd-Frank Act. Id. at *1. Trans-Lux moved to dismiss Kramer’s claims. Id. at *1, *3.

The Court Holds That Plaintiffs May Bring Dodd Frank Anti-Retaliation Claims Even If They Did Not Provide Information to the SEC in a Manner Established by the SEC

The anti-retaliation provision of the Dodd-Frank Act provides that:

No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower—(i) in providing information to the [SEC] … or (iii) in making disclosures that are required or protected under the Sarbanes- Oxley Act of 2002, the Securities Exchange Act of 1934, including section 10A(m) of such Act, and any other law, rule, or regulation subject to the jurisdiction of the [SEC].

15 U.S.C. § 78u-6(h)(1)(A) (emphasis added). A “whistleblower” is defined as “any individual who provides, or [two] or more individuals acting jointly who provide, information relating to a violation of the securities laws to the [SEC], in a manner established, by rule or regulation, by the [SEC].” 15 U.S.C. § 78u-6(a)(6).

“Trans-Lux argue[d] that the retaliation provision applies only to those individuals who are both (a) a whistleblower under section 78u-6(a)(6), and (b) have engaged in one of the protected activities listed in section 78u-6(h)(1)(A).” Kramer, 2012 WL 4444820, at *3. “Under this theory, Kramer would not [have been] entitle[d] to sue under the retaliation provision, because he [did] not provide[ ] information to the SEC in a manner required by the SEC, and [was] therefore not a ‘whistleblower.’”6 Id.

Kramer responded that “Trans-Lux’s interpretation would effectively make section (iii) of the retaliation provision moot, because individuals who have engaged in activity described in section (iii) are not, by definition, whistleblowers.” Id. at *4. “Kramer argue[d] that those who make disclosures that are required or protected under the Sarbanes-Oxley or the Securities Exchange Act of 1934 are clearly entitled to protection against whistleblower retaliation, even if those individuals do not otherwise fall under the definition of ‘whistleblower’ found in section 78u-6(a)(6).” Id.

The District of Connecticut found that it was not “unambiguously clear that the Dodd-Frank Act’s retaliation provision only applies to those individuals who have provided information relating to a securities violation to the [SEC], and have done so in a manner established by the [SEC].” Id. This interpretation “would dramatically narrow the available protections [for] potential whistleblowers.” Id. Moreover, the court found that “[s]uch a reading seems inconsistent with the goal of the Dodd-Frank Act, which was to ‘improve the accountability and transparency of the financial system,’ and create ‘new incentives and protections for whistleblowers.’” Id. The District of Connecticut also noted that “the only two courts to consider the matter both have held that the definition of ‘whistleblower’ is broader with respect to the anti-retaliation section than it is for the rest of the statute.” Id. (citing Nollner v. S. Baptist Convention, Inc., 852 F. Supp. 2d 986 (M.D. Tenn. 2012) (Trauger, J.); Egan v. TradingScreen, Inc., 2011 WL 1672066 (S.D.N.Y. May 4, 2011) (Sand, J.)).

The court next considered an SEC rule promulgated in August 2011 “to clarify the interplay between section 78u-6(h)(1)(A), the retaliation provision, and section 78u-6(a)(6), the statutory definition of ‘whistleblower.’” Id. The SEC rule provides in relevant part:

For the purposes of the retaliation protections afforded by Section 21F(h)(1) of the Exchange Act (15 U.S.C. 78u-6(h)(1)), you are a whistleblower if:

  1. You possess a reasonable belief that the information you are providing relates to a possible securities law violation … that has occurred, is ongoing, or is about to occur, and;
  2. You provide that information in a manner described in Section 21F(h)(1)(A) of the Exchange Act (15 U.S.C. 78u-6(h)(1)(A)).

17 C.F.R. § 240.21F-2(b)(1). Trans-Lux contended that “the SEC’s rule is an impermissible construction of the statute because it would allow potential plaintiffs to pursue under the Dodd-Frank Act retaliation claims they would have otherwise pursued under Sarbanes-Oxley,” which also provides protections for whistleblowers. Kramer, 2012 WL 4444820, at *5. “This is problematic, Trans-Lux assert[ed], because the Dodd- Frank Act has a longer statute of limitations than Sarbanes-Oxley, and no exhaustion requirement.” Id.

Rejecting Trans-Lux’s argument, the District of Connecticut found that “the Dodd-Frank Act appears to have been intended to expand upon the protections of Sarbanes-Oxley, and thus the claimed problem is no problem at all.” Id. Because “[t]he SEC’s rule is a permissible construction of the Dodd-Frank Act,” the court explained that it was obligated to follow it. Id.

Applying the SEC’s rule, the District of Connecticut determined that “Section 78u-6(a)(6)’s requirement that the information [must] have been provided ‘in a manner established, by rule or regulation, to the [SEC]’ does not apply to section 78u-(h)(1)(A).” Id. “Instead, an individual must only allege that he possessed a ‘reasonable belief that the information’ provided ‘relates to a possible securities law violation,’ and that he provided the information in a manner described in section 78u-(h)(1)(A).” Id. The court explained that “‘[t]he contradictory provisions of the Dodd-Frank Act are best harmonized by reading 15 U.S.C. § 78u6(h)(1)(A)(iii)’s protection of certain whistleblower disclosures not requiring reporting to the SEC as a narrow exception to 15 U.S.C. § 78u-6(a) (6)’s definition of a whistleblower as one who reports to the SEC.’” Id. (quoting Egan, 2011 WL 1672066, at *5).

The Court Finds That the Complaint States a Dodd-Frank Act Retaliation Claim

Pursuant to 15 U.S.C. § 78u-6(h)(1)(A)(iii), “disclosures that are protected under Sarbanes- Oxley’s whistleblower provision are also protected under the Dodd-Frank Act’s whistleblower provision.” Id. at *6. “Sarbanes-Oxley protects persons who disclose information [to their supervisors that] they reasonably believe constitutes a violation of SEC rules or regulations … .” Id. “[T]he conduct at issue need not have actually constituted a violation of the SEC rules or regulations—by the language of the whistleblower provision, the whistleblower need only have reasonably believed that it was a violation.” Id.

Here, the court found that “[t]he language of the emails and letter in which Kramer raised his concerns demonstrates that he may have reasonably believed Trans-Lux to be committing violations of SEC rules or regulations.” Id. at *7. “Therefore,” the court determined that “Kramer ha[d] alleged sufficient facts to support a Dodd-Frank Act whistleblower claim based on his internal and external communications.” Id.